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    [NGW Magazine] Financing LNG: have banks lost their appetite?

Summary

This article is featured in NGW Magazine's Volume 3, Issue 1 - What does the future hold for LNG financing? The difficulties of raising even modest sums for minor projects shows the risk appetite is not what it was, as market changes pose new risks.

by: Mark Smedley

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Natural Gas and LNG News, Premium, NGW Magazine Articles, Volume 3, Issue 1, Corporate, Investments, Infrastructure, LNG

[NGW Magazine] Financing LNG: have banks lost their appetite?

What does the future hold for LNG financing? The difficulties of raising even modest sums for minor projects shows the risk appetite is not what it was, as market changes pose new risks.

Panellists at the CWC 18th annual World LNG Summit conference in Lisbon, November 30 were divided on the what the future holds, depending on whether the focus was on upstream or further downstream projects such as LNG to power, or floating receiving terminals. But veterans said there is still a healthy appetite to lend to strong projects.

French bank Societe Generale, a leading financier of LNG export projects, indicated that banks are still in the market to finance good projects. Roberto Simon, SocGen’s New York-based managing director in charge of project and energy finance in the Americas who joined the bank in 1997, acknowledged much has changed in the past three years. 

“We’re waiting to see what happens. From 2012 to 2015, we provided $40bn [of project financing] on the back of tolling agreements and LNG price contracts. Now we’re being told that we are no longer going to get these,” said Simon. “Maybe we’ll have to take some project risk, or there will still be some long-term contracts, but of shorter duration,” he added – in other words, less debt, and a higher cost of financing. “We’ll engineer solutions around people’s problems,” he said. But why?

“Banks are hungry for product…. If we have new projects, they will be well received,” said Simon, explaining that 2017 had been a lean year in terms of lending to US oil and gas projects, and 2012-17 was meagre in US conventional power; $10bn to $15bn of debt had been refinanced as bond debt. 

A senior industry specialist at World Bank lender International Finance Corporation (IFC) Alan Townsend had a completely different view, but admitted the IFC “takes a buyer-side perspective.” IFC has financed power projects in Brazil and Pakistan that include LNG import terminals. The latter typically involve ‘terminal use agreements’, with flat annual payments that fully cover operating costs. “Even if there’s zero despatch at the Brazil terminal, the bank gets paid. And when it runs, it will run flat out. When it rains, it won’t. But it doesn’t always rain in Brazil,” said Townsend.

For the IFC, 2016-17 had been busy years – but it still sees a lack of good projects out there. “The reality is the world is awash with good capital, looking for good projects. Sometimes the IFC is kicked out of a project, because we’re never the cheapest, as we need stronger project sponsors.  Thinking of sub-Saharan Africa, there have been about three dozen power-purchase agreements (PPAs) and four to five gas supply projects, but the only one happening is the Sankofa one in Ghana that we financed. Authorities in some countries never say yes – but they never say no either.”

He said that when you hear about US merchant generator AES’s involvement in a project, such as in Panama, then invariably it gets financed – because AES is credible and has a track-record. Townsend challenged head-on the notion, espoused by established LNG exporters, that the global LNG market was out of balance, simply because there’s more LNG supply than global demand. “The fact is that markets are in balance today. There are clearing mechanisms: in winter it’s China; in spring, it’s northwest Europe. There is always room for a low-cost LNG producer be it Qatar, PNG or the US,” the IFC expert continued: “If there’s an apparent surplus, then so long as the product [LNG] is commoditised and is produced at low-cost, then the market works.”

Josh Zhao, global head of oil & gas finance at Beijing-based ICBC Financial Leasing, said his firm was looking at the floating storage and regasification units (FSRUs) – such as the IFC has financed in Brazil and Pakistan – but has a particular eye on the Chinese market. “We want to develop up, mid- and downstream,” said Zhao, before explaining that China already has some 13 receiving terminals – including some FSRUs – already operating at 60% capacity. He pointed to pent-up demand in China, that has seen gas increase from 6.7% now to a forecast of 10% of total primary energy supply in China by 2020 in a matter of a few years. “We’re looking for reliable partners,” he added.

The message from the recent US presidential trip to China, in Zhao’s view, was: ‘Don’t just buy US gas for China, but invest downstream in the country too.’ He’d heard that Tellurian, which is seeking investors in its planned US liquefaction trains, will do a roadshow for Chinese LNG buyers in 2018.

Edward Ruijs, managing director of real assets at BlackRock’s global energy and power infrastructure division, represented the private equity and other fund investors on the panel. “We look to invest from FSRUs to floating liquefaction (FLNG); but as an equity investor, we ask: Will our project be on time and will each counterparty deliver what they say they will do?” he said. Picking up on the panel’s theme that many more FSRUs will be developed worldwide in the coming years, Ruijs said that already there are about 25 FSRUs today and that, were that to double to 50 in the next few years, that would represent a lot of risk for investors. “Still we’ve invested $1bn of equity in the last few months,” added the BlackRock executive: “But it’s been very clunky, such as an investment in a combined-cycle gas turbine (CCGT), and a gas pipeline such as the one BlackRock funded in Oklahoma. It comes in big cash sums.”

He said the unwary investor can come a cropper in big energy investments. “Once you burrow into contracts, you find a termination clause, or a price review clause, that undermines the project. Will the gas be there when needed? Can you invest in such projects? Sometimes we pull out, despite having invested $20mn on due diligence.” BlackRock agreed $300mn to buy a 50% stake in Oklahoma’s Glass Mountain Pipeline company, in a deal announced early November and due to close late 2017. Last year it agreed to invest 10% of the project cost of the 1.1-GW Cricket Valley CCGT, due to start up 4Q 2019 supplying New York state.

The panel was asked by former senior Total then EDF gas executive Dominique Venet, who now runs his own consultancy Gleamergy, if they would finance a project on TTF prices – the leading gas hub in Europe. SocGen’s Simon responded: “if your feedstock is indexed to something other than TTF, then no. If your feedstock is priced off TTF, or willing to take that risk, then yes,” he added, though qualifying that by saying it would help if it was backed by a long-term contract.

BlackRock’s Ruijs said his firm would not want to take price exposure: “So we might try to buy a [price] hedge, but if we can’t, then no.” His firm would not finance a project outside Europe on a European price index as “even selling into a deep market [such as TTF] isn’t reliable enough.”

Townsend of the IFC said the more competitive gas market hubs, the merrier: “It helps if you can have competitive gas markets in Shanghai and Dubai to be able to lend on these,” he said, hinting that Asian import projects are perhaps not quite ready to be financed off these emergent hubs. 

Historically, oil has been the principal index on which long-term LNG contracts into Asia have been structured, and there’s evidence that even newer shorter contracts – unless for US LNG imports – still have a sizeable component of oil indexation, even if some are using hub gas prices. Finance adviser at LNG consultancy Poten Melanie Lovatt asked panellists if other funds – such as bond investors – could be attracted to participate in LNG project financings at an early stage. She cited how Stonepeak had come to Australian LNG’s Magnolia LNG export project in Louisiana mid-2017 with a $1.5bn commitment even though the project has yet to take final investment decision (FID). Stonepeak’s commitment is a fixed coupon ‘bond-style’ redeemable Preferred Interest in Magnolia LNG, having a 12-year tenor from its financial close.

“There are lots of pockets of capital,” SocGen’s Simon responded, including asset managers like BlackRock and Pimco. He said the reason why banks are often chosen was because they take delayed draws – in other words, relatively lengthy payback periods. He acknowledged that some insurance companies are now looking at that type of financing too, with some also accepting a floating interest rate; but he said their participation would be a function of the price. 

Barcelona has been a popular choice for the CWC event in the past, but the latter’s status on the fault line of Spanish/Catalan politics – plus interest in how Portugal is using LNG to provide energy to islands like Madeira – made Lisbon a popular choice in 2017 and, it is planned to hold next year’s there too.

Mark Smedley